Surety Fraud Probe Raises Question: Who is Melde Rutledge?

Prior to its bankruptcy, American Architectural had subcontracts for a part of a renovation at the the New-York Historical Society in New York City.

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Contractors John Melching Jr. and Dallas Collins are based in Pennsylvania and Texas, respectively, and have never met, but they have something in common: They claim they have been cheated in the past year by a business transaction that involved Larry Polec, a Chicago-based surety-bond broker.

Polec is easy to spot. He is a former Michigan State basketball player who stands 6 ft, 8 in. Less easy to spot, however, are his roles in and links to an informal network of brokers and individual sureties whose controversial practices have allegedly cost contractors hundreds of thousands of dollars in lost premiums on bonds. Melching goes one step further: He says their practices put his company out of business.

Regulators and insurance investigators say the dual roles served by some players in these "ad hoc" contractor surety-bond markets, and the murky connections among the companies involved, make it difficult to ferret out the bad actors.

For example, after getting a recommendation from Polec, Collins says, he sought bonds for another contractor in San Antonio and paid $36,000 for them after receiving an invoice from an Atlanta broker, JLM Risk Management. The invoice named Polec as a co-producer. Four months into the project, Collins learned that these bonds from a Chubb subsidiary—a Treasury-listed corporate surety—were actually forged documents. None of his $36,000 premium was returned.

Collins couldn't tell who owes him the money. "I'm trying to determine if [the first two brokers we dealt with, including Polec] are involved or are innocent and got taken," he adds.

Polec, who holds insurance licenses in Michigan and Illinois, says he meant to make only a referral for Collins. "We're all in the good spirit of doing things the right way," Polec said in a phone interview. About Collins' bonds, Polec said, "JLM handled the transaction, and I received no compensation. … [The fraudulent bonds] did not touch my hands."

Polec, who has no criminal record, has no known links to similar fraudulent Chubb bonds that also have surfaced in Maryland and Florida. But he does operate as a broker through a company called Krisilis LLC. Melching says he paid another company linked to Polec, surety Diamond Indemnity, for bonds on six New York City subcontracts worth $23 million.

Diamond Indemnity President Darius X. Johnson has suggested in sworn testimony that Diamond Indemnity's leader is Melde Rutledge, a West Palm Beach, Fla., resident who has served time for fraud and who has gone by the names Mel de Rutledge and Mel Rutledge, according to documents obtained by ENR.

"Mel de Rutledge has been running strange operations for years," including "false valuation scams" and surety guarantees, according to research by investigator Trevor Jones of West Sussex, England-based Insurance Security Service compiled in 2004.

Many Links to New York City Projects

Diamond Indemnity provided bonds for Melching's subcontracts, most in the range of $2 million to $7 million, for work on projects at the New-York Historical Society Museum & Library, the PATH station at the World Trade Center and Four World Trade Center. The prime contractors include leading firms such as Skanska and Lend Lease.

When American Architectural asked Diamond Indemnity for help after a $400,000 shortfall on a project for Mt. Sinai Medical Center/New York University last year, Diamond Indemnity declined to pump in any additional funding. By summer, American Architectural went into default on other jobs and filed for bankruptcy, says Melching.

Johnson said in an interview that Diamond Indemnity finally decided not to fund American Architectural's operations because American Architectural had misrepresented its financial condition, especially concerning federal taxes owed.

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